California Eminent Domain Report : a blog following condemnation, inverse condemnation, and regulatory takings written by attorneys with Nossaman LLP.

Another recent interesting court decision was somewhat lost in all the excitement last week over (1) the County of Los Angeles v. Glendora Redevelopment Project case striking down Glendora's redevelopment plan for inadequate blight findings and (2) the US Supreme Court decision in the Stop the Beach Renourishment, Inc. v. Florida Department of Environmental Protection case rejecting a "judicial takings" claim. 

That recent decision was by the California Court of Appeal in City of San Jose v. Union Pacific Railroad, which came down a month ago, but received little attention as an unpublished decision on a narrow valuation issue.   But on June 11, the Court decided to publish its opinion, making it a whole lot more relevant to us eminent domain attorneys. 

In Union Pacific Railroad, the city sought to condemn an easement across a strip of land owned by the railroad company in order to widen an existing street.  The court held that the railroad was entitled to only nominal compensation for the portion of the property actually used for the rail line, explaining that a special rule applies in such circumstances pursuant to a 1925 California Supreme Court decision, City of Oakland v. Schenck (1925) 197 Cal. 456.

With some thoughtful analysis, it seems pretty clear that the Court got the decision right.  Under the facts as presented in the case, the easement did not diminish the value of the fee given its highest and best use as a rail line, meaning nominal value makes perfect sense -- and constitutes fair market value.  

But the Court apparently found the case to be more novel, concluding that it was bound to follow Schenck, but that the end result was a decision that did not afford the owner fair market value for the property taken.   In my opinion, the Court's analysis is wrong, even though its decision was right. 

For more details about the case, feel free to read my E-Alert, Court of Appeal Holds that a Condemnee is Not Always Entitled to Fair Market Value – But is That Really What the Court Means?
 

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A fundamental premise underlying eminent domain laws is that the owner is treated fairly under principles of just compensation.  This means that the owner receives fair market value for the property being condemned.  And, where there is an active, relevant real estate market with ample comparable sales data, this premise can be upheld through traditional appraisal methodologies. 

Unfortunately, not all markets include legitimate, open market transactions from which to gather comparable sales data.  This is especially true where market conditions have deteriorated; in other words, the very conditions that exist today.   I have spoken on this subject several times in the past couple of years, but I believe many still do not understand the full impact of how current market conditions impact eminent domain cases.

Alan Ackerman, a Michigan eminent domain lawyer and editor of the National Emient Domain Blog, wrote a recent article in RE Business Online entitled Determining Fair Market Value which addresses just this issue.   It walks through the concept of fair market value and the problem current conditions create.  He explains:

Because most jurisdictions identify a specific date for the transfer of title and property values are subsequently assessed based on that specific date, there is greater potential for an artificially low value assessment based on what may be an unfavorable “snapshot” in time. 

In other words, condemnees are penalized because they are forced to sell at a time when no reasonable seller would do so.  And, exacerbating the problem, the data one typically finds around those dates of value represent distressed sales, for which one could reasonably argue there never is a true, willing seller.  But, where that tainted data is the only data that exists, appraisers will often use it to establish value.  Mr. Ackerman concludes:

Fundamentally, the underlying premise of fair market value is that property is sold without compulsion. To conclude that the sale must be made on a particular date could, for many owners, severely endanger the opportunity to receive just compensation, simply because they are not willing sellers in the marketplace.

Yes, market conditions will change, and this problem will go away.  In the meantime, however, we will continue to struggle with assessing fair market value where the date of value falls during a severely depressed market. 

There is one potential bright side for those practicing eminent domain in California.  We have a statute designed to deal with situations in which no "relevant, comparable market" exists.  Code of Civil Procedure section 1263.320 allows compensation to be established by "any method of valuation that is just and equitable" in such situations.  This should provide appraisers with the flexibility necessary to adopt creative valuation scenarios where market conditions do not provide adequate, untainted data.  How far courts will go in allowing appraisal testimony that does not follow traditional methodologies under the auspices of section 1263.320 remains to be seen.

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Just a few weeks ago, we reported on Tulare County's plans to condemn a number of properties to facilitate the widening of Road 80.  Now, Visalia Times-Delta reporter Valerie Gibbons reports that Tulare County is considereing condemnation for four additional parcels, this time to facilitate the widening of Road 108 (or Demaree Street) between Visalia and Tulare. 

The November 11 article, "Board of Supervisors moves to seize land for Road 108 project while still in property negotiations," explains that both the Road 80 and Road 108 projects raise the same concerns from property owners:

In both cases, the widening projects will be affecting farmers who say the county isn't offering enough money to stem losses from lost product, moving fences or taking out equipment.

With these new cases, Tulare County will have filed 21 eminent domain actions for the projects, which are being funded -- at least in part -- by government stimulus dollars. 

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Eminent domain lawyers who practice in Los Angeles County Superior Court are all familiar with LA County's detailed local rules on eminent domain -- "Chapter 16."   Chapter 16 is the chapter in the Los Angeles County local rules that deals specifically with eminent domain, and it contains meticulous procedural rules for the conduct of condemnation cases in Los Angeles. 

Key provisions involve an elaborate "First Pretrial Conference" requiring a substantial, joint written submission to Department 59 (the LA County eminent domain department), along with detailed expert exchange requirements that go well beyond the Statement of Valuation Data required under California law.  (The state-wide requirements for the contents of a Statement of Valuation Data appear in Code of Civil Procedure section 1258.260.)

Last week, Commissioner Mitchell held a meeting of local eminent domain attorneys to discuss proposed changes to the local rules for eminent domain [PDF].  A key purpose of the meeting was to obtain input from the attorneys who live with these rules every day about the proposed changes. 

At this point, nothing has been decided about any changes to Chapter 16; indeed, the next step may involve the formation of a small committee to analyze what changes are appropriate.  However, the proposal and the discussion at last week's meeting are informative.   Indeed, the very fact that the court is taking into account the views of the eminent domain attorneys who will be most affected by any changes that occur indicates the process is likely to be well thought out. 

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On Tuesday, the City of Lake Forest voted unanimously to move forward with plans to condemn a 6.11-acre parcel to use as a land swap with the County of Orange.  The property will likely end up being incorporated into Whiting Ranch Wilderness Park. 

According to Orange County Register reporter Erika I. Ritchie, in her November 4 article "City moves forward with seizure of family's land," the property's owner, the Hernandez family, has resisted all efforts by the City to acquire the property voluntarily.   But the City needs the property to complete a land swap with the County that will facilitate the City's plans for a sports park:

[C]ounty officials have agreed to a land swap that will provide the city with more space for its proposed sports park and the county with an added parcel to become part of Limestone-Whiting Wilderness Park.

The real issue, as is most often the case when the government resorts to eminent domain, appears to be money.  The Hernandez family believes the property should be valued for a commercial use, and claims that such properties are selling for $25 to $45 per square foot.  The City's appraiser has apparently concluded that the property's highest and best use is not commercial, as the City's offer is purportedly for only $3 per square foot.

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In his September 16 article entitled “DWP outmaneuvered on Kern County land purchase,” Los Angeles Times reporter David Zahniser described a story full of political intrigue. It seems someone with ties to Mayor Villaraigosa acquired a property out from under the Department of Water and Power (“DWP”), only to immediately offer to sell the property to DWP at a hugely inflated price. While the article focuses mainly on the political aspect of the situation (e.g., did the buyer know about DWPs plans for the property when it purchased it, etc.), the eminent domain angle is also interesting.

The property, known as Onyx Ranch, encompasses about 68,000 acres east of Bakersfield. It has long been viewed as a potential site for a wind farm, and the DWP sought to acquire it for that purpose. As DWP was working on obtaining control over part of the property through a partnership with Padoma Wind Power, J. Ari Swiller stepped in an bought the property for $42 million. Even before closing escrow on the purchase, Swiller offered to sell part of the property to DWP for $65 million. When DWP balked, Swiller sold the property to the City of Vernon (which has its own electric utility company). Now, DWP must contemplate condemning the property from Vernon if it wants to proceed with the wind farm.

Stripping away the politics, this situation highlights a precondemnation strategy that landowners can sometimes use. By knowing an agency’s planned condemnations in advance, sophisticated landowners look for opportunities to purchase properties ahead of the condemnation. Where they can negotiate a great deal or, more typically, where they can assemble multiple parcels to create a more valuable highest and best use for the combined parcels, they can reap huge rewards. With a known government buyer waiting in the wings, such property “flips” can be quite profitable. Of course, as with all high reward strategies, this gambit comes with considerable risk:

1. The government’s plans or funding may change, and the intended condemnation may never materialize, leaving the owner with a property he or she probably never wanted in the first place, facing the prospects of looking for a buyer that may not exist.
2. Such purchasers must buy knowing they are walking into a lawsuit against the government, a though many may find unappetizing.
3. The government holds a significant ace up its sleeve any time an owner tries to hold it hostage by charging far more than a property is really worth because it knows the seller badly needs it. In the “real world,” sellers in such situations can command huge premiums, because a seller who must have a particular property will pay far more than its “fair market value.” When the purchaser is the government, it can largely ignore such demands for premiums, knowing it can condemn the property at its fair market value.

In the end, while this landowner strategy can (and has) been used quite successfully in some circumstances, it requires a sophisticated landowner and an initial seller willing to sell for far less than what the buyer thinks will be its fair market value when the government comes calling.

Photo credit: LA Times

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